Pressure on RBI to cut rates; EMIs to dip?

If you are planning to buy a house or an automobile, or if you already have a home loan running, you would probably be keeping a strict watch on the Reserve Bank of India’s (RBI) policy rate annoucnement on Monday.

The RBI is widely expected to cut lending rates in its mid-quarter review meeting as India’s key currency administrators and macroeconomic managers seek to jumpstart Asia’s third-largest economy, at a time when a persistently falling domestic currency is threatening to push up a moderating inflation rate back to uncomfortable levels.

The central bank has already cut the repo rate, its key lending rate, thrice since January. Business leaders have been rachetting up their demand for a repeat action on Monday. The repo rate, the rate at which RBI lends to commercial banks, now stands at 7.25%.

A lower repo will bring down banks’ borrowing costs, which in turn, may prompt them to slash interest rates for final home, auto and corporate borrowers.

India’s June-September monsoon is also likely to be normal, the Met department said on Friday, brightening prospects of bumper crops and economic recovery, crucial for a government heading into a general election.

Adequate rains will help the government to focus on growth, essential for jobs and income, while curbing inflation and checking its fiscal deficit. For India to achieve 9% growth, farm growth needs be to be at least 4%, which is tied to the monsoon.

But the rupee, whose value has fallen 8% since March, has knocked up prices of crude oil and other imported goods. On Saturday oil companies announced a hike in retail petrol prices by more than R2.50 a litre and diesel prices are expected to go up by the end of the month to make up for a higher landed costs of crude oil.

Costlier fuel, which raises the cost of ferrying goods across locations, has can potentially raise prices of goods and services, limiting RBI’s elbow room to slash interest rates.

"Broadly, incoming data suggest that growth remains weak, while lower input costs are not yet being adequately passed onto consumers; this is keeping inflation expectations high. Given sticky consumer inflation and the difficulties in financing the current account deficit, we remain comfortable with our view of no rate cut at the June policy meeting," said Sonal Varma of Nomura.